Sustainable finance at the heart of combating climate change

Funding to combat climate change, the green bond market, and increasing demand for labeling schemes, indices and financial models that address the risk of climate change… The financial world is now gripped by climate-related issues! Find out how in the LinkedIn article published by ENGIE Environmental and Societal Responsibility Director Anne Chassagnette.

Article published January 16 on LinkedIn (extracts)

After a year marked by an unprecedented series of major climate events in 2017, the process of climate change now underway is clearly the most important global challenge requiring our collective response.

International agreements now in place put us on track for an increase in global temperatures in excess of 3°C, and therefore far removed from the goals set out in the Paris Climate Agreement just two years ago, which aims to contain the global rise in temperature to below 2°C, with an aspirational target of 1.5°C.

It is therefore clear that a much higher level of involvement is required, which will demand nothing short of a revolution in our current production and development methods.

Finance has a key role to play in driving this revolution. The role of finance is fundamental to stimulating the rollout of energy efficiency and low-carbon projects. The redirection of billions in investment funding is required to bring about this transformation of our business models.

Large finance players and, investment funds therefore have a key role to play, and must be involved in all these discussions and considerations. This was indeed the goal of the One Planet Summit held on December 12 last year in Paris, which set out to re-motivate the COP21 contributors and bring global funds together to combat climate change.

The financial world is now gripped by climate-related issues. This is a fundamental shift, and the number of investors putting their financial muscle behind commitments to combat climate change by reducing the carbon footprint of their portfolios is expanding rapidly. This movement already involves the giants of fund management, including the Norwegian sovereign wealth fund, AXA, Allianz, BNP Paribas and others.

Against this background, we are seeing the emergence of some constructive approaches based on dialog between investors - sometimes in the form of investor coalitions - and companies. Investors are asserting their commitment to engage in a process of dialog with companies to inform the strategic decisions required to reallocate capital expenditure to sustainability projects. BlackRock is a leading example of this approach.

Important advances in the transparency and publication of climate-related financial information were also made last year. The Financial Stability Board (FSB) working group known as the Task Force on Climate-related Financial Disclosures (TFCD) has published its final report, which contains a series of recommendations regarding information to be included in financial reporting: 11 types of transparent disclosure are expected in the 4 key areas of Governance, Strategy, Risk Management and Metrics & Targets.

In terms of mechanisms, we are seeing rapid growth in the green bonds market:2017 saw record issue levels equivalent to €120 billion, and some experts expect the next level of €165 billion to be breached during 2018. For a corporate group like ENGIE, this is a powerful lever for making the transition to low-carbon businesses and decentralized digital-based solutions. So far, the Group has issued more than €6.25 billion in green bonds, with a very recent €1 billion issue at the start of 2018.

The need to account for climate risk in financial analyses and the insurance industry is now essential.The IMF now includes climate risk in its macroeconomic scenarios and models, and identifies the delay in combating climate change as one of the main risks with the potential to derail global growth. Leading ratings agencies like S&P are also focused on the issue of environmental and climate risks and their impact on corporate ratings. They believe that there is a high probability that we will see corporate rating downgrades as a direct result of these risks going forward. Lastly, we are also seeing growing demand for labeling schemes and indices for financial products dedicated to combating climate change and promoting the energy transition.

Leveraging private- and public-sector funding, and creating an innovative environment to facilitate the development of sustainable finance

Development funding is essential if we are to succeed in making the transition to a low-carbon economy. We have to design innovative financial tools that take account of climate risks and climate-related initiatives at the point of investment analysis, and develop financial models that are better at assessing future value.

We must develop innovative financial tools and the accompanying incentives needed to accelerate the rollout of low-carbon technologies. The barriers we still see today, and which raise questions over costs and funding, must be broken down.

The Commission Strategy and Action Plan on Sustainable Finance to be unveiled by the European Commission this March follows up on the report submitted by the High-Level Expert Group (HLEG) on Sustainable Finance, and should facilitate further progress towards sustainable finance, as well as stimulating the market for green financial products through the inclusion of a Green Supporting Factor, and the introduction of a taxonomy for the green economy and European green labeling schemes.